A Fundraising Toolkit for Startup Founders.
What should and shouldn't be there?
For several years, I have been contemplating the creation of a startup founder's legal toolkit for fundraising. Particularly focussing on stuff I understand, deal terms.
The goal of course being to make a more significant impact by assisting many founders rather than just a few. It's after all, every lawyer's dream to serve a thousand people at the cost of a coffee rather than one person at the cost of a castle. Though we lawyers are just too well-trained in pushing the can down the road when it comes to creating scale, and also suffer from financial disincentives.
So, what should a founder's toolkit look like, and what issues should it address?
Balancing Information Overload
Not every founder needs to be overwhelmed with information. While experienced founders do tend to become as knowledgeable as their lawyers, some decisions are too important to leave to others or remain uninformed. However, providing excessive information and detailed analysis can lead to confusion.
There is also another problem. Founders inevitably get better at it across rounds, but it might be too late for things to change.
The Crux of the Problem
The challenge lies in identifying and addressing the most critical concerns for founders. Legal documents can be complex, and knowing what to focus on is crucial.
Things can get very muddled with information overload and lawyers trying to come across as knowledgeable. It is also important to know what NOT to care about.
If you are told you need legal representation to prevent legal liability, i.e., hey you don’t want to sign on something that will get you sued!
It sounds common-sensical and might even be true in edge case ways, but that isn’t why the investors and VCs have lawyers writing their drafts. To find ways to sue you isn’t why they are 40-100 pages long. In most kind of legal documents, not getting sued in usually on your checklist of reasons to hire a lawyer. In deal docs, yes, there will be situations where your investors might be honeytrapping you into a law suit. How many have I seen? 1 out of every 50, mostly in later stages.
When they hate you, want to get rid of you and you are already fairly powerless (most likely because you didn’t have your bases covered, read on) - quite possible. By then, you should already have an excellent legal team and know this toolkit many times over.
When presented with deal docs, what should a founder care about? Lets boil down the questions only to what matters the most. They are:
Protecting their equity in the company (and its value): Ensuring that you benefit when your company succeeds and understanding potential situations where the company prospers, but you lose out.
Maintaining control over the company: Determining if you can be removed from their position, otherwise disempowered and what happens to your equity in such cases.
The investor has very different concerns from a founder, and there will be several point of friction and disagreement on how much a founder should agree to, which might not impact the above, but are nevertheless important, such as - when you promise an exit or whether they can sell along with you. These are distractions.
Discussing them isn’t trivial. It is important you engage in them in good faith with you investors, and they can complicate your life, but they are still distractions.
Ideaboard for the toolkit
The Founder's Deal Terms Toolkit (not a very sexy name, is there a better name?) therefore should revolve around the two central ideas, and map out how every deal term and possible fundraising situation relates to the problem statements that matter to you as a founder.
If sorted on these questions, you sleep well and are sufficiently empowered to deal with problems as they arise. If you solve for everything else while playing loose on these, you start with handicaps, realising you were always wounded but the realisation coming too late to matter.
How you can help
This newsletter has now reached 700 subscribers, including entrepreneurs, angel and professional investors, lawyers, students, and tech enthusiasts. As the best reviewers for the founders' toolkit, a first release will be made available free to all subscribers of this letter. Your thoughts and feedback will be invaluable in refining and enhancing the toolkit for the benefit of all founders. More details to follow.
Until next time!